Insurance Contracts Summary of project and proposed Update Larry Smith, FASB member Jennifer Weiner, FASB senior practice fellow

Why is the FASB issuing a Proposed Accounting Standards Update?  Existing U.S. GAAP guidance on accounting for insurance contracts is comprehensive but:  Consists of multiple models developed incrementally over time  Has not been subject to comprehensive reconsideration by FASB before this project  FASB/IASB stakeholders overwhelmingly favored joint project  Stakeholders identified several areas of improvement to long-duration models and short-duration model  Aspects of existing accounting models inconsistent with more recently issued guidance and areas of diversity in practice 2

Definition of an insurance contract A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or its designated beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder Insurance risk can be either underwriting risk or timing risk Significant insurance risk cannot exist unless there is at least 1 scenario in which the present value of net cash outflows can exceed the present value of cash inflows Applies to all contracts meeting the definition of an insurance contract regardless of type of company issuing the contract 3

Building block approach (BBA)  Present value of unbiased, probability-weighted estimate of future cash outflows less future cash inflows  Cash flows include all costs directly attributable to or allocable to fulfillment of contracts including expected value of options and guarantees  Discount rate reflects the characteristics of the liability  Premium recognized as revenue over the coverage period in proportion to the value of coverage and any other services  Exclude from revenue and expense amounts expected to be returned to the policyholder or its beneficiary regardless of an insured event occuring  Recognize changes in assumptions in net income, except for changes in the discount rate which are recognized in other comprehensive income  Expected cash inflows greater than expected cash outflows  Recognize as revenue as the uncertainty (the risk) in cash flows decreases  Present acquisition costs incurred as an offset to the margin and recognize as an expense in same pattern as margin Fulfillment cash flows Margin 4

 Contractual premiums within boundary of existing contract  Adjust for time value if contract has significant financing component unless meet practical expedient  Reduce for qualifying acquisition costs incurred, if not immediately expensed  Adjust liability if portfolio of insurance contracts is onerous  Recognize revenue for reduction in the liability for remaining coverage on basis of passage of time or expected timing of incurred claims  Exclude from revenue and expense amounts expected to be returned to the policyholder or its beneficiary regardless of an insured event occuring  Recognize expense when claim is incurred  Present value of unbiased, probability-weighted estimate of future cash outflows for claims that have been incurred  Discounting not required if effects are immaterial or when incurred claims are expected to be paid within one year of insured event  Recognize changes in discount rates in other comprehensive income Liability for remaining coverage (UPR) Liability for incurred claims (reserves) Premium allocation approach (PAA)  Expected future premiums within boundary of existing contract  Adjust for time value if liability for remaining coverage is adjusted Receivable 5